I saw a bank advertising their “Robo Investor Advisor” a few days ago. They advocate a no knowledge needed approach where you place your investment trust in their “intuitive system.” I have a contact marketing system that is intuitive; because it knows which email to send based on the status of the contact I am mailing. That doesn’t mean I want that system investing my money.
In my opinion, this Robo Investor Advisor is symbolic of the landscape that produces nothing but failure with Real Estate Investors. In this Blog, I will introduce reasons why people fail and then options, other than the obvious, for you to pick from. Not everyone is a Real Estate Investor.
Don’t get in over your head: People are impatient and ultimately lazy. They are excited by success stories and decide that real estate investing is the right path for them as well. “Financial freedom in ten years or less?? Hell yeah!!” So, they rush out and start buying rental properties before they know what they’re doing and before they’ve done the work to educate themselves. No analysis, no deep understanding of their market, no planning – just jumping at whatever opportunity presents itself. TAKE YOUR TIME! Do not invest until you fully understand what you are doing. Real estate investing is not a get rich quick scheme.
Educate yourself and do your research: Numbers never lie, but it can be easy to run the wrong numbers! Not doing enough analysis and research is a very common mistake. A lot of investors review a property that rents for $1000/month with a mortgage of $750/month including taxes and insurance and they think: “Great! I’m going to make $250 per month in cash flow.” But, after property management, vacancies, repairs & maintenance, and all other expenses they end up losing $250 a month. You have no chance of getting the right cash flow from a property if you have the wrong math going in. Make sure you know how to run your numbers correctly. Always run your numbers conservatively by factoring expenses higher than you expect.
Make sure you have cash reserves: An unfortunate, but common issue in real estate investing is under-capitalization – or not having money to cover an expense. Sometimes it’s the result of over-leveraging. An investor simply buys too many properties, too quickly, with too much debt and margins too low. Sometimes it’s the result of poor planning. The investor may simply go spend all their money on other things, not leaving themselves enough of a cash buffer to cover a major repair. Whichever the reason may be, they leave themselves in a dangerous and precarious position of not having enough cash on hand. All of the sudden an HVAC system goes out at one property. A major plumbing leak happens at another. A tenant stops paying and they have to go through a lengthy eviction process. A tenant leaves a property in shambles and they lose months of rent as well as having to renovate the property. Everything big thing that could go wrong does go wrong in a short period of time. If you don’t have enough to cover all those costs and continue to pay the mortgage you can lose everything.
Although potentially lucrative speculation is equally, if not more-so, dangerous and risky: A lot of real estate investors are speculators, meaning they are investing based on the hopes of their investment gaining value by a certain time. There are multiple ways investors speculate in the market. All forms of speculating are just theme and variation of the same investment strategy. An investor purchases a building or land with the hopes that at some point in the future (usually years) it will be worth multiple times what they paid. At the time of purchase, they might lose some money every month in the beginning, but they are speculating on their long-term bet paying off and making up for the early losses many times over.
People have made a TON of money doing this. But many people have also LOST everything when their speculations don’t pan out. Sometimes they lose everything because the uptick they were planning on took a lot longer than expected and they didn’t have enough money to get through the losses at the beginning. In other cases, they placed the wrong bet and the uptick never happened. In some extreme cases, the market actually went down below their original purchase. I only invest in properties that are performing well now and avoid speculating.
Take the time to establish solid systems and a solid team: Some investors fail simply because they don’t treat real estate investing like a business. This is most common for people who choose to self-manage their properties. There is a lot of room for error in property management. Many don’t have good (if any) screening processes for tenants. Or they aren’t strict on rent collections. Or slack on any other number of huge list of things that a property manager is responsible for. Even if they have hired property managers, there are many ways to fail by not treating their business like a business. They could have been lax on hiring the members of their investment team. Or maybe they didn’t implement any systems to watch over and track their investments. Without proper oversight it’s easy for things to run very poorly. If this goes on too long, it may be too expensive to get it back on track. Real estate investing can require very minimal time and be a very passive investment once all your systems are in place.
You MUST know your WHY: Many investors simply don’t have a big enough motivator to invest the time and effort to get their real estate investments going properly. I have said several times, but it bears repeating: This is not a get rich quick scheme. Real estate investing takes time to learn. Tradeoffs have to be made to save up to invest. The early returns will be very small. Without having a big “why” many investors end up failing because they stop caring and stop putting in the effort. You have to have something driving you to continue working toward your goal year after year. Another reason that not having a big enough why causes investors to fail is simply because they never get started.
If you haven’t recognized the theme of all the failures, it usually falls back to a failure of the person. It’s not that real estate investing is inherently risky. The risk in real estate is diminished greatly with proper education or planning on the part of the investor.
Risk comes from not knowing what you are doing. Take as much time as is required to educate yourself so that you really know what you are doing. And finally, know why you’re doing it.
Let’s go back to the Beginning:
Rule #1. Do your homework. There are a great many people who are in prison because they took advantage of people for their personal financial gain. Financial gain is your goal. You’d better know more than the person with whom you are investing.
Rule #2. Have a Plan. Most of us have heard the adage, “Failing to plan is planning to fail.” When I first started investing it was through a Non-Profit of which I was the Executive Director. I thought I knew all I needed to know; I mean after all I had bought 4 homes for my family by the time that purchase occurred. I made an astute purchase of a foreclosed single-family home, from a bank, in what I thought was a good area and proceeded to hire a contractor who was recommended by a Realtor friend. Making a long story short, I was ignorant of the process, unfamiliar with renovation requirements imposed by the City; uneducated on how a house was constructed, limited in the capability to create a scope of work and had not set aside near enough money to pay for it all. Suffice it to say it took three times the normal construction period and twice the money to do it right. The Non-Profit lost $10,000 on that questionable endeavor.
Rule #3. Choose Investments Wisely. Dr. Dolf de Roos said, “The most expensive piece of real estate is the six inches between your right and left ear. It's what you create in that area that determines your wealth. We are only really limited by our mind.” This is why education is so important. I speak from experience when I say, “Learn First!” You will increase the value your currencies, guaranteed.
Currencies? What am I taking about? Each of us have multiple currencies. We have money, we have time, we have tools and we have relationships. Each of those are increased in value if we have the knowledge to advance our project forward expeditiously.
If you’re borrowing money and you’re unaware it takes 3 months to get through permitting, the money you borrowed is costing you 3 month’s extra interest. if you mistakenly pulled your first construction draw, you’re also spending an additional 3 months of time and time is money. Your tools you used to sell your house may no longer be valid, because costs have increased causing you to reevaluate your sales process as you attempt to recover the lost time and money and finally your relationships with the lender, the crew you hired to do the rehab has had to schedule another job and the neighbors are upset the project is taking so long. One mistake damaged the project substantially and could have been averted if you have received the education to foresee the due diligence needed in the beginning. Take the time to invest in learning everything you can.